The latest chapter in the developing German trade tax issue unfolded in a meeting held earlier this month. The meeting, held by the Finanzausschuss (financial committee) of the German parliament in early April, counted the BaFin (the German bank regulator) and Deutsche Bundesbank (the German Federal Bank) among its attendees.

The draft tax bill from earlier this year appears to have been well received among industry experts, and, according to market sources, the financial committee has set a May 21, 2003 deadline to decide on the draft bill. The German parliament is expected to deliver its final decision June 6, 2003.

If the proposed changes are sufficiently clear and well thought out, they could eliminate trade tax risk for true sale securitizations of assets originated by financial institutions. According to Fitch Ratings, the provisions that must be made to execute true sale structure under the current law have limited the number of transactions completed thus far.

Under existing regulations, an SPV established in Germany is accountable for trade tax on 50% of interest paid to noteholders. "Even if the SPV is located physically outside Germany, uncertainty exists due to conflicting statements from the authorities as to where effective' establishment would lie," reports Fitch. "Since a German originator would carry out both the servicing and collection functions in a securitization transaction, some market participants believe that the SPV's place of establishment would be seen as being within German borders."

Even with the proposed changes not yet cemented, a true sale initiative is already in the works between six of the leading German banks including Commerzbank, Deutsche Bank, Dresdner Bank, DZ Bank, HVB Group and KfW. Under the true sale initiative, the promotional bank, KfW, would act as a neutral moderator since it would not include any of its own credit portfolios into the securitizations.

"Ultimately, the reason why we are participating has to do with our official mission to provide support - above all to small and medium-sized enterprises, or SMEs," said Hans Reich, chairman of the board of managing directors of KfW.

A recent survey conducted by the bank showed that financing conditions have deteriorated for 45% of German companies, and at least one-third of these companies have difficulty obtaining any loans at all. KfW has promoted the securitization of SME and housing loans through it's already hugely popular PROMISE and PROVIDE synthetic platforms, reducing the equity charge for the issuing banks and simeoultaneously creating more opportunities for them to grant new loans to SMEs.

"The idea to set up a joint special purpose entity was born when we realized that the ABS market in Germany was lagging far behind other countries with regard to true sale securitization'," said Reich. "We have to catch up in this respect if we want to remain internationally competitive. Thus, from the very beginning, our intention has been to establish an infrastructure that can be used by as many banks as possible - not only by the members of the True Sale Initiative."

The initiative is now in its initial steps; last week, representatives of the participating banks signed a memorandum of understanding declaring their intention to set up an SPV for the purpose of true sale securitizations. The speed at which the project develops depends on how quickly the legal framework is ratified. The partcipating banks are actively engaged in submitting proposals that support the adjustment of the legal and tax framework, said Reich.

The SPV will be set up as a limited liability company. "Due to its business activity it will not be a credit institution in the sense of the KWG (the German Banking Act), but a financial company with a very limited scope of action specializing in the buy-up and securitization of loan portfolios," explained Reich. The only business activity of the SPV will be to purchase and securitize loans, thereby reducing exposure to risk.

Reich emphasized that the portfolios will primarily consist of triple-A securities and will not purchase non-performing loans. The SPV will also bring portfolios of other banks into the market with the intent of granting access to a cheaper source of funding to smaller banks.

Reich indicated that he expects the participating banks to meet in the near future to sign a letter of intent and hopefully to enter the foundation phase of the company. On a positive note, he added that the market could possibly see the first transaction before year-end.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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